from the not-really-stickin'-it-to-the-man dept

South Park creators Trey Parker and Matt Stone have built an entire comedy empire on the back of free distribution. The pair first came to fame by circulating their animated short, The Spirit of Christmas, for free first as a popular bootleg VHS and later on the Internet. They also were among the first TV show creators to operate their own web portal to provide content for free, striking a (at the time) groundbreaking 50/50 ad revenue sharing deal with Viacom. They were the grandfathers of viral content, with free distribution leading them to the mammoth financial and critical success South Park saw at its peak, and continues to enjoy today.

So with the news that Parker and Stone have struck a new, $192 million exclusive, walled off South Park streaming deal with Hulu, it's a little odd to see Stone suddenly forget what made much of his rise to success possible. In an interview discussing the huge Hulu deal, Stone laments how amorphous, villainous "tech guys" demanded he make his content available online, for free:

"This is now particularly satisfying," said Stone in a recent discussion. "It comes full circle since the tech guys came to Hollywood and said you better give us your stuff for free to put online or else it will be taken from you anyway."

The argument that "tech guys" just want everything to be free is a fairly normal response by those who don't understand the digital economy, and are informed that you can reduce piracy by incorporating free into your business model. But again, this is a particularly weird comment coming from Stone, whose entire career foundation was built on such models (apparently begrudgingly). That freemium models help reduce piracy is something Stone appeared to understand perfectly well when talking to Boing Boing back in 2008:

"Basically, we just got really sick of having to download our own show illegally all the time. So we gave ourselves a legal alternative."

"NY Times: You’re now about two years into the operation of your South Park Studios Web site, where just about all the content is available for free. Does the gamble seem to be paying off?

PARKER: To be honest, we don’t care about the money. We both have all the money we need. It’s really just about the survival of the show. First hearing about, O.K., we’re going to be putting everything on the Internet for free, I was like, Really? Wow, O.K. [laughs] That’s the world we live in. I’m actually surprised at how smooth the transition is going.

STONE: If we had years and years to discuss it, and we had determined what the right course of action was – but we don’t have years and years. We’re doing the show right now in 2010, and the reality is, we have to have our show on the Internet. Would the network like it if everyone who watched it for free on the Internet actually had to pay? Yes. But it always ends up helping us when people can see the show.

Yet here we are, the better part of a decade later, with Stone clearly annoyed by what he insists is Silicon Valley's demand that he not get paid for his hard work:

"Frankly, in the past I haven't much liked dealing with the people from Silicon Valley. I don’t like our stuff being talked about as content. Spoons are metal and guns are metal, but they're not the same thing. We don’t make content. We make television. And that's now what digital understands it has to pay for."

Arguing that "content" is a reductive word is understandable, but this narrative that ambiguous "digital" enemies in Silicon Valley don't want to pay for television programming is odd, since "digital" has been paying an arm and a leg for content since inception. Netflix, for example, is expected to spend as much as $5 billion in 2016 on programming, making the streaming operator the second largest content buyer behind ESPN. Does that strike you as a "digital" industry that doesn't think there's a price tag for quality television? Perhaps Stone is just developing a nasty case of "get the hell off my lawn" and no longer has the best memory, perched as he is upon precariously-leaning towers of money.

Streaming companies, broadcasters, and content creators alike also don't appear to understand the potential pitfalls these exclusive streaming arrangements create. While 2015 has been a banner year for the evolution of internet video by any standard, there's been a troubling rise in not only exclusive content deals (Hulu, owned by Comcast/NBC, also shelled out $160 million for exclusive streaming rights to Seinfeld), but also standalone streaming services from every broadcaster under the sun (even those B-grade schlock masters over at Lifetime), each of which is going to be eager to lock their own content down exclusively to keep it out of the hands of more successful third-party operators.

While streaming operators might correctly believe that having exclusive access to select programming can lure customers in the short run, fracturing the content availability landscape in such a fashion could have some nasty downsides. Making consumers hunt and peck their way through an endless variety of $7 to $40 streaming packages for what they want might easily drive annoyed consumers back to piracy (something we've been saying for years). Streaming operators also risk driving those users back to cable if the industry ever wakes up and decides to offer a more uniform value proposition. Right now that's not a risk, since cable execs are still obliviously raising rates in the face of increased competition; but it will be.

Internet video was supposed to be something different and better, built on the legacy dinosaur bones of an industry obsessed with turf protection and utterly terrified of disruption. There were notable lessons learned during internet video's rise during this period; hopefully they're not all mysteriously and suddenly forgotten just as internet video starts reaching its true potential and the money truly begins to flow.

from the you-made-your-bed dept

Reports have started to emerge that regulators at the Justice Department may block Comcast's proposed $45 billion acquisition of Time Warner Cable, with DOJ attorneys crossing the t's and dotting the i's before recommending a deal rejection. Comcast is apparently meeting with the DOJ this week as part of a last-ditch effort to save the deal, though leaks have suggested Comcast may walk away from the deal entirely if the merger conditions are too steep (read: actually have them do much of anything for the public interest), including requiring that Comcast sign off on Title II reclassification and the FCC's new net neutrality rules.

Apparently one of the sticking points for regulators during the review was their realization that Comcast failed to adhere to most of the conditions attached to its 2011 acquisition of NBC Universal. It's worth noting that Comcast volunteered most of the conditions attached to that deal. Even then the cable giant failed to adhere to many of them; such as the requirement that they offer and clearly advertise a 6 Mbps, $50 broadband tier for at least three years. An FCC investigation found that the company made the tier difficult to find and sign up for, so Comcast was fined the inconsequential sum of $800,000 for its behavior.

New leaked reports suggest that the DOJ was particularly ruffled by the fact that Comcast ignored NBC deal conditions related to Hulu, which Comcast acquired as part of the deal. Co-owned with Disney and 21st Century Fox, Comcast was restricted from playing a managerial role in the company for fear it would hinder the service's chances at being a truly disruptive Internet video competitor. But DOJ lawyers apparently found that Comcast largely ignored those restrictions, playing a starring role in scuttling the sale of Hulu, out of fear that it would become a more viable competitor to Comcast's services:

"Yet Comcast’s assurances at the Sun Valley meeting played a significant role in how its co-owners evaluated the sale process, people familiar with the other owners’ thinking said. Comcast told its partners it would help make Hulu the nationwide streaming video platform for the cable TV industry, which would boost the site’s growth and make it a stronger rival to Netflix.
That influenced Disney and Fox’s decision to call off the sale when the conference was ending, people familiar with those companies’ thinking said. Among the top bidders for Hulu were Comcast rivals DirecTV and AT&T Inc."

We've long noted how Hulu's owners were so afraid of Hulu being truly disruptive, they've hamstrung the service at every opportunity. As such, it's long been little more than a glorified ad for traditional television, with incomplete catalogs and a preponderance of "clips" presented in such a way as to intentionally drive users back to legacy cable. Comcast's involvement post NBC deal certainly helps explain how, despite some executive decisions, the service remains in that role to this day.

It's notably amusing that Disney and Fox actually believed Comcast when it claimed it actually wanted to build Hulu into a Netflix competitor -- by shackling it to the walled-garden mindset of the cable industry. Just as amusing is that Comcast has tried to claim that Hulu is part of a "fierce competitive landscape" that will keep the company in check should regulators approve its acquisition of Time Warner Cable. In other words, Comcast is arguing that a company it intentionally sabotaged to keep from being competitive is a perfect example of the kind of competition that can keep Comcast honest moving forward.

It's possible regulators may still approve the deal, but it seems increasingly likely that if Comcast wants the deal to go through, they may have to sign off on some conditions that are more than just paper mache simulacrum.

from the my-wooden-unreasonable-arguments-are-entirely-my-own dept

Comcast faces obvious regulatory and public relation obstacles in getting its $45.2 billion acquisition of Time Warner Cable approved, given concerns about vertical integration and scale. Comcast last week got a running start on selling the deal to regulators by insisting that allowing them to get absurdly massive would somehow be "pro-consumer." Comcast's other big argument last week appeared to be the idea that the larger company couldn't possibly use its larger size as anti-competitive leverage, because Google Fiber (with all of its 1,000 or so users) and Hulu (which Comcast co-owns) would somehow keep Comcast honest.

If you watched AT&T's ham-fisted acquisition attempt of T-Mobile, you know that this is just about the time when Comcast's lobbyists, PR agencies, "non-partisan" think tanks, consultants and various other policy tendrils all work to create a massive media sound wall insisting that the deal will be really wonderful for consumers. Most reasonable people generally understand that an already universally-despised company with a history of anti-competitive behavior getting much more powerful isn't a great thing, regardless of their beliefs. But buried among the massive wash of complaints about the deal are some folks who'd like you to know the deal is secretly awesome. And not just kind of awesome, but a-benefit-to-humanity-the-likes-of-which-you-may-not-see-again awesome.

"Not only is the Comcast-Time Warner Cable merger pro-competitive, via the improvement of services and innovation for millions of Americans and many thousands of businesses, this merger also is occurring in the most competitive communications marketplace with the most consumer choices ever. It should be approved"...

"Since the last cable-to-cable mergers were approved about a decade ago, every single facet of the communications marketplace has become dramatically more competitive, dynamic, and innovative.”

Yes, when two of the worst-ranked companies for customer satisfaction -- from the worst ranked industry for customer satisfaction -- in one of the least competitive industries in the country get together -- magic happens. History has proven it. So has your incredibly inexpensive and "dynamic" cable and broadband service.

You'll note deal supporters are quick to (correctly) point out this isn't really about market share or competition (at least in telecom), since Time Warner Cable and Comcast don't directly compete. However, supporters-for-hire like Cleland intentionally ignore how a larger Comcast has even more leverage to use regulatory capture, content licensing deals, and ever-expanding broadband usage caps in a broadband market that's actually getting less competitive as AT&T and Verizon back away from it. It's also worth noting that Comcast's historically-low customer satisfaction rankings are thanks to growing too quickly for customer support to keep pace and a lack of competition, and another deal fixes neither. The deal's problems aren't really about competition (at least in telecom), but size and scale.

"...the economic benefits of the combined efficiencies and economies of scale will flow to consumers in the form of lower prices and/or higher quality service. Comcast expects to save about $1.5 billion in annual operating efficiencies through the deal. The combined company, which will have 30% of the pay TV market, will also be able to drive harder bargains with upstream content providers, resulting in savings that will be passed on to cable subscribers."

I'm not sure in what plane of reality the cable and broadcast industry ever passes on savings to you, but it's not the one most of us inhabit. Whether it's modem rental fees, below the line surcharges, soaring cable TV costs, or the ramping up in usage caps and overages, cable broadband is an industry that prides itself on not competing on price. I guess I should note here that Comcast's David Cohen, on a conference call defending the deal last week, stated "we're certainly not promising that customer bills are going to go down or even increase less rapidly." Apparently the ITIF has no problem making that promise for Comcast.

It's always hard to know where the for-hire astroturf ends and genuine-but-just-plain-wrong opinion begins (which is the entire point of astroturf). Enter TechFreedom, a non-profit think tank that, like most such groups, doesn't disclose its funding -- professing its insights are driven solely by its honest Libertarian leanings (perhaps that's even true, I'll give them the benefit of the doubt). The think tank believes the deal will be truly nifty, and consumers don't have to worry about Comcast bullying Internet video startups because Comcast has kindly agreed to keep adhering to the FCC's dead net neutrality protections:

"When Comcast bought NBC Universal in 2011, it agreed to a long list of conditions required by the FCC, including special protections for online video distributors and Net Neutrality rules. These remain in effect even though the D.C. Circuit Court has struck down the same rules in the FCC’s Open Internet Order. The deal will extend these protections to eight million Time Warner Cable subscribers."

Well, no. People crying over the FCC's freshly-deceased net neutrality protections fail to remember (or never knew) that the rules didn't do all that much. They don't really cover wireless whatsoever, and the language of the rules (because it was crafted predominately by industry) allows for all manner of discrimination -- just as long as the carrier uses faux-technical justifications to claim it's for the protection and safety of the network (don't worry, regulators won't check). The rules did restrict outright blocking of competing content and services on fixed-line networks, but generally no incumbent ISP is dumb enough to do that and incur heavier regulation prompted by public outcry. It's also worth noting that most of the conditions attached to the NBC acquisition were suggested by Comcast itself and, like the neutrality rules, don't do much of anything by design.

TechFreedom goes on to pretend the deal will make service better and lower consumer bills (again, as if rate reductions ever happen in the cable industry), before finishing its love letter to industry with the claim that it's not broadband carriers that are responsible for limited sector competition -- it's all the local governments' fault for being jerks:

"Those concerned about broadband competition should focus on the real problem: barriers to entry created by local governments and the pricing of rights of way and pole attachments,” added Szoka. “That’s what’s made it hard for companies like Google, Verizon and Centurylink to build fiber networks. Last summer, Szoka explained in Wired that it’s local governments, not cable companies, that are to blame for hampering broadband competition."

While I knew that towns and cities could occasionally be annoying in TV franchise and pole attachment negotiations, I was just as shocked as you to learn that awful protectionist bills write themselves, politicians bribe themselves, and you pay $70 for a 3 Mbps DSL line because your Mayor is mean. I'm equally amazed to learn that mediocre, over-priced broadband isn't the product of limited competition, regulatory capture or myopic investors too short-sighted to wait for investment returns, but entirely because of the villainous machinations of Billy and Janet Burbit on the Podunk town council. Nefarious, indeed.

For the record I do think the deal could bring a few small improvements to some users. Comcast might be an upgrade for users in markets where Time Warner Cable has historically been even worse at providing either faster speeds or improved television services and set top boxes (looking at you, New York City). It's again those Comcast usage-cap "trials" where my attention is fixated, as all the upgrades and promises in the world don't matter if Comcast insists on arbitrarily throttling the pipe to the detriment of smaller businesses and startups. Deal supporters like to insist regulators will crack down should this happen, but so far regulators have dumbly nodded in agreement that usage caps and per gigabyte overages are just "creative pricing innovation."

Over the next few months you'll start to notice a pattern of editorials popping up in papers and on websites around the country. They'll all cling to the same talking point insightful logic, with none of the outlets noting any author's financial ties to industry. Be aware that these individuals and groups, no matter how specious, wooden and incoherent their arguments might be, are simply looking out for your well being as consumers because they're good people. That said, Comcast might want to tread carefully. Part of the reason the AT&T/T-Mobile deal put a bad taste in regulators' mouths (aside from it being based entirely on lies, totally unnecessary and reducing competition) was AT&T's hubris in making pretty much any bizarre claim they wanted, from the idea that reducing competition increased competition, to the argument that the inability to acquire T-Mobile would harm children and make the Internet explode.

That's not to say the Time Warner Cable/Comast merger isn't still totally awesome. I'm just saying that those who want the deal to succeed (whether you're paid to take that position or not) might just want to dial back the bullshit just a tad this time around.

from the oh-come-on dept

We've been following the Ultramercial case quite closely over the past few years. If you're not aware, this involved a company that more or less patented the idea of "you must watch this ad to get this content" (US Patent 7,346,545) and then sued pretty much everyone. Most of the companies it sued settled rather than fight (which happens all the time), including YouTube and Hulu, but one company, WildTangent, has continued the fight. Eventually, though, the case reached the Supreme Court with the key question being does taking an abstract idea like "watch this before getting that" and adding "on the internet" to it make it patentable? It's well established that you can't patent an abstract idea, but for some reason many seem to think that if you say "on the internet" it's no longer abstract. The Supreme Court did not do a full hearing on the case, but asked the appeals court of the federal circuit (CAFC -- known as the patent appeals court) to reconsider its original ruling in light of the Supreme Court's ruling in the Prometheus case, where it said that you can't patent broad medical diagnostics. The rule there was that you "could not simply recite a law of nature and then add the instruction 'apply the law.'" So, is the same true for "abstract idea" plus "on the internet"?

Apparently, for CAFC, the answer is that there is a difference, and that merely adding "on the internet" to an abstract idea makes it patentable. The ruling is quite incredible, not just for the fact that it sets up a ridiculous standard, but also for its technical naivete. CAFC basically says, gee, there are a lot of steps and graphs and charts in the patent, so, it's probably not abstract.

Viewing the subject matter as a whole, the invention
involves an extensive computer interface. Unlike Morse,
the claims are not made without regard to a particular
process. Likewise, it does not say “sell advertising using a
computer,” and so there is no risk of preempting all forms
of advertising, let alone advertising on the Internet.
Further, the record at this stage shows no evidence that
the recited steps are all token pre- or post-solution steps.
Finally, the claim appears far from over generalized, with
eleven separate and specific steps with many limitations
and sub-steps in each category. The district court improperly
made a subjective evaluation that these limitations
did not meaningfully limit the “abstract idea at the
core” of the claims.

Part of the issue is that it needs to show something new here, and the court seems to argue that any software effectively creates a "new machine" based on some really wacky logic. It states "as computer scientists understand":

a
programmed computer contains circuitry unique to that
computer. That “new machine” could be claimed in terms
of a complex array of hardware circuits, or more efficiently,
in terms of the programming that facilitates a unique
function.

Read that again. They're saying every software program creates "unique circuitry." That's how they claim this is a "new machine" making the idea patent eligible. However, as computer scientist, Tim Lee pointsout, this claim is "nonsense."

It seems that, once again, CAFC is not getting the Supreme Court's message clearly. We've already gone through this with Myriad and Mayo cases. In Mayo, CAFC twice ruled that diagnostic tests were patentable, even after the Supreme Court gave it an extra chance to correct that. That resulted in the Supreme Court slapping down CAFC and rejecting medical diagnostic patents. Then, CAFC, similarly did the same thing with gene patents, only to be smacked down just last week.

This is a nearly identical situation. CAFC rules one way ("yes, of course this abstract idea/thing of nature is patentable"), the Supreme Court says "are you sure?!? please look at this other ruling," and CAFC comes back with "yes, we're sure! patent patent patent!" The last few times that's happened the Supreme Court has had to smack CAFC down, and it looks like it may need to do so again.

from the looking-kind-of-bad dept

If one were to make a short list of the top great ideas that were implimented horribly, unbelievably wrong, Hulu would have to be somewhere between The View and the United Nations (I'll let you decide what goes where, exactly). Hulu was the once promising entertainment venture that has ugly-morphed its way into a mere excuse for entertainment studios to claim they offer people what they want. All the while there's been some discussion about whether or not the studios that own Hulu are purposefully trying to tank it to keep people from cutting the cable cord. And throughout all of this, Hulu has never really caught on with the same kind of fevered pitch as Netflix or even Amazon for streaming service customers.

Reader Vidiot writes in about a Business Insider piece detailing all the reasons why Hulu may have one foot in the grave and the other foot hovering just over it. Amongst the less-than-awesome facts on Hulu's list are items such as a new request for $200 Million from investors, reported losses of $30 Million per quarter, and that Hulu is trying to compete against Netflix while spending one-tenth the money on original content and one-ninth the paid subscriber base. The article announces that because of all that, it's time to conclude that Hulu is a failure, but don't blame corporate leadership.

The fact is (CEO Jason) Kilar had an almost impossible job from the very beginning. Hulu doesn't own the content it distributes, so it only gets to keep a small portion of its revenues. Hulu is, in fact, owned by the companies that own said content. And those owners have little incentive to create healthy margins for Hulu at the expense of their own. The fact is, Kilar has, in a couple years, built a Web brand that you have heard of. Yes, this was done on the back of free TV and a big marketing budget. But it's still decently impressive.

I'm not sure how we went from failure to impressive in less than a hundred words (which is impressive, by the by), but I am sympathetic to Hulu's raw deal from the studios that own it -- something Mike has been pointing out for nearly four years. That said, I don't think Hulu is a failure that is so far failed that it can't be brought back from fail-dom. After all, I've heard that Justin Timberlake is taking some time away from bringing sexy back to work on bringing Myspace back and if that mess of a social network can rise from the internet grave, Hulu can too.

But whoever is going to try to bring Hulu back from the prep-coffin, it appears it isn't going to be the afore mentioned Jason Kilar, because he's decided to bail. By all accounts, Kilar tried, really tried to make this thing work, but despite some successes it's not wrong to say that Hulu hasn't turned out to be what some folks thought it would. Given the raw deal that Hulu has gotten, the conflicts of interest heading up the company, I don't blame Kilar one bit for leaving. Hulu needs to innovate despite its issues, or else we can get the funeral march going.

Wales had used everyone's favorite example these days: the difficulty in finding a legitimate way to pay for Game of Thrones online...

Wales also argued that the entertainment industry needs to continue adjusting its business model so it offers people the content they want. Citing a personal example, Wales noted how he can’t watch HBO’s “Game of Thrones” series at home in London even though he’s willing to pay for it.

“I think that he media industry needs to say, 'Look, why don’t we sell people what they want to buy,’ and I think that will take care a huge proportion of the problem,” he said.

“Our studios are constantly partnering and innovating new ways for audiences to watch the movies and TV shows they love: Hulu, HBO Go, Vudu, Crackle, UltraViolet, Epix, MUBI – and that just barely scratches the surface,” said Kate Bedingfield, a spokeswoman at the MPAA. “There are more legitimate avenues available today to watch movies and TV shows online than ever before, and our studios are continuing to innovate every day to bring audiences even more options.”

“At the end of the day, stealing shows and movies out of convenience still harms the people who work hard to make them,” Bedingfield added.

In other words, don't actually address what Wales said. Don't respond to his specific complaint. Insist that because you're doing something, even if it doesn't solve the problem he noted, you're clearly doing enough... and then revert back to talking point numero uno: oh, poor us, we're harmed! So harmed. Harmed into our best years ever at the box office... (oh wait, they leave that last part out).

Seriously, the MPAA needs to hire communications people who actually deal with consumers, rather than politically-focused ones. They seem to have absolutely zero sense of how to respond to the public on anything without making themselves look worse. The last two decades of RIAA/MPAA communications have been a long-term case study in exactly how to do everything wrong.

Less network investment, less competition, higher prices. Great for investors, not so great for you

Bode's piece focuses on Moffett's silly analysis that the DOJ's interest is in how Comcast and Time Warner are trying to stifle Netflix and Hulu and that will somehow increase prices (huh? what?!?) because they'd take away Moffett's preferred solution of anti-consumer data caps.

However, I wanted to focus in on the larger issue here: the idiocy of short-term Wall Street thinking over long term strategy. Wall Street functions on a quarterly basis mostly -- with an occasional nod to looking out a full year, but rarely anything further than that. This creates stupidly short-sighted incentives that are deathly towards anyone with any long term goals or strategy. It argues that any big strategic investments don't make sense, because they cost lots of money in the short term, but you won't see payback until outside the myopic window of vision of these Wall Street analysts.

Perhaps that's great for day traders, but as Bode notes, it's bad for the public. And here's the thing: it's actually even worse for companies. It's unfortunate how many companies find themselves slaves to Wall Street analysts views in making their strategic planning efforts. Because that holds them back from actually making the important big strategic investments they often need for the future. Every so often you have a more visionary leader who simply ignores the folks like Moffett. You get situations like Ivan Seidenberg at Verizon, who ignored Moffett and invested in fiber -- which is why it's still competitive today. Unfortunately, as Seidenberg got closer and closer to retirement (which happened last year), the company backed away from continuing its build out. Short term thinking over long term thinking.

In some ways, this is the flipside to the Innovator's dilemma. It's an explanation for why big legacy companies fail to respond to disruptive innovation: because they can't. Because they can't put in the effort to be ready for disruption and instead leave themselves wide open to such disruption by not investing in their future, but rather by listening to the Craig Moffetts of the world -- such that the money that could be building a company for the future instead ends up in the hands of Moffett's real clients: the short-term investors.

If we want to build a stronger economy that builds jobs and continues to innovate, we have to figure out a way to diminish the power of Wall Street's short-term focus, and how to incentivize companies to understand what investing for the long run means.

from the took-'em-long-enough dept

For quite some time now, we've been reporting on how the big television players were so upset that Hulu and Netflix were dragging them kicking and screaming into the 21st century (even though they owned Hulu) that they were working on plans to kill off both services -- or at least cripple them. Mostly, what this goes back to is the inevitable fact that the internet is going to subsume television. But, these days, there's so muchmoney in TV, thanks to the ability to be a gatekeeper, that all efforts are on holding back the internet for as long as is humanly possible. Want to know why HBO refuses to offer a standalone internet streaming option? It's because of the monopolistic power of cable.

This has all been pretty obvious for years, but the Justice Department has finally begun investigating Comcast/NBC Universal and Time Warner Cable to see if any of their actions with regards to Netflix and Hulu trip the antitrust wire. In particular, they seem focused on whether or not tiered broadband plans are actually designed to keep people from using competing online services, and preventing people from cord cutting. For Comcast, the risk may be much higher. As part of the merger with NBC Universal, it made certain promises to the government concerning how it treats online services. If it's not living up to those promises, it could mean trouble.

Unlike some other antitrust investigations, this is one where you can make a strong case that these companies are making life worse for consumers, by using their natural monopoly positions to keep prices artificially high. That said, I have little faith that the DOJ will get things right with the investigation. I think it's likely that the natural economic pressure of cord cutting (which, despite denials from Hollywood and the cable industry, is very very real) is going to have much more of an impact on the eventual massive reconfiguration of the television market than any antitrust lawsuit.

from the getting-warmer... dept

We've been following the "Ultramercial" case for a while. This was about a company that got a patent (7,346,545 that is basically about requiring you to watch an ad before you can watch some content). Ultramercial sued Hulu, YouTube and WildTangent. The case bounced around the court system for a while, with some using the Bilski ruling to reject the patent as an "abstract idea." However, CAFC (the appeals court that handles patent appeals and always seems to have a soft spot for patents) said the concept was perfectly fine. In reading through the details, CAFC's explanation was basically that since the patent described doing this abstract idea "on the internet," suddenly it became patentable. Back in March, we wrote about WildTangent's appeal to the Supreme Court, which pointed out the ridiculousness of saying that as long as you add "on the internet" to an abstract idea that it suddenly becomes patentable.

While it felt like there was a good chance that the Supreme Court would hear the case, there was one other interesting development that happened a week later: the Supreme Court smartly rejected broad patents on medical diagnostics in the Prometheus Laboratories v. Mayo Labs case, noting that such patents are on unpatentable subject matter. Specifically, the ruling held that "A patent, for example, could not simply recite a law of nature and then add the instruction 'apply the law.'"

The petition for a writ of certiorari is granted [G]. The judgment is vacated [V], and the case is remanded [R] to the United States Court of Appeals for the Federal Circuit for further consideration in light of Mayo Collaborative Services v. Prometheus Laboratories, Inc., 566 U.S. ___ (2012).

This actually makes a lot of sense. The Prometheus ruling makes clear that saying "general idea + apply this idea" is not patentable subject matter. And yet, CAFC's ruling in the Ultramercial case basically said the opposite, noting that "general idea + apply this idea on the internet" is patentable subject matter. So, once again, it appears that CAFC's completely out of touch view of the patent system is getting smacked down by the Supreme Court. CAFC now has these two more chances to get it right and to stop slobbering all over ridiculous expansions of the patent system. Hopefully CAFC gets it right the second time around, and the ruling in Ultramercial is useful in limiting ridiculously overbroad software patents.

from the why-is-that-always-missing-from-the-equation? dept

We've all seen the crazy high claims by the legacy entertainment industry about the "costs" of infringement. Most of these reports have absolutely no basis in reality and have been widely debunked -- even by the US government itself. But, even if we grant that there are some "costs" to infringement, why is it that we rarely -- if ever -- hear about the costs of enforcement? Julian Sanchez has a great post riffing off of the news that Hulu is thinking of requiring proof of pay TV subscriptions to get any free content, and does a neat little thought exercise on how distorting the "cost of piracy" discussions are if you don't also look at the cost of enforcement. He puts forth a hypothetical:

To illustrate, let’s imagine television show that initially streams online for free with advertising, garnering a million viewers per episode and earning $1 per viewer in ad revenues, for a total of $1 million. A small number who really dislike ads, or have connections too slow for streaming, let’s say 5,000, download pirate copies anyway—but the vast majority watch legally. After building an audience and generating some good word of mouth, the accountants suggest that it might be more profitable to stop the free streaming and instead sell ad-free episodes for $4, in hopes that enough dedicated fans will pony up to compensate for the predictable drop in viewership once the program is no longer free to watch. The paying audience does indeed drop to 255,000, which still leaves the company slightly better off for the switch, but 100,000 viewers decide to keep up with the show (at least initially) by downloading pirated copies. A subsequent price hike to $10, however, turns out to be a money loser. Now the show has only 80,000 paying viewers, while 150,000 are engaged in piracy.

Undoubtedly that piracy is costing the show’s producers something: If piracy were impossible, some unknown fraction of those who download illegally would be willing to pay the asking price. But just crudely using the actual market price at each stage—even if modified by some constant “displacement rate” to acknowledge that not every illicit download represents a lost sale at that price—yields some perverse results. As the pricing strategy for the show changes, the “cost” of piracy rises from $5,000 to $400,000 (even as revenue rises) to $1.5 million (while revenues drop by $20,000). Obviously, something is wrong here.

It’s no great mystery what: The problem is that the rate of piracy, the price of a digital good, and the “displacement rate” (the percentage of the pirates who’d buy at that price in a world of perfect copyright enforcement) are not independent variables. And, of course, the interdependency runs both ways: Pricing decisions are influenced by the knowledge that we don’t live in a world of perfect enforcement, and you can tell plausible stories according to which this might keep prices higher or lower than they’d be under perfect enforcement, depending on your assumptions about the conditions under which a particular audience will substitute the pirate for the legal good.

But it goes further than that, which is that when you factor in the cost of enforcement, the equation changes somewhat:

Returning to our imaginary program, suppose that under perfect enforcement—a zero piracy world—there would be 110,000 paying viewers at $10 per episode, netting the creators an additional $80,000 over what they’d make with their revenue maximizing strategy ($4 per episode) in the world of imperfect enforcement. That’s great for them, if not for consumers, but we haven’t factored in the costs of enforcement. Some of these are likely to be borne by the creators themselves—hiring lawyers to hunt down pirate copies circulating online and the like—but in practice they’re often shifted to taxpayers, in the form of direct enforcement expenditures, or to other parts of the economy, in the form of DMCA compliance costs or innovative services that are deterred entirely. It’s possible that, in this hypothetical scenario, the revenue maximizing strategy for the producers is to charge $10 while externalizing the costs of perfect enforcement, but the socially efficient outcome is to accept imperfect enforcement and let the producers revenue maximize against that background at a $4 price point.

As Sanchez admits, many of these numbers are theoretical, just for the sake of the thought exercise. But what we know in reality is that the cost of enforcement -- whether direct or through externalities -- almost never enters into the discussion in any meaningful way, even though it's absolutely there.

What's amazing is that even when the costs are explicit, they barely enter the conversation. Take, for example, the predecessor to SOPA/PIPA: the ProIP Act, which passed in 2008. A report by the Congressional Budget Office showed that the cost of this bill, which is almost entirely focused on increased enforcement was $435 million. Yes, you read that right. Taxpayers have been on the hook for nearly half a billion dollars for the increased enforcement initiatives -- like the spectacular flop known as Operation In Our Sites. Is this really a wise use of taxpayer resources?

Add to that, of course, the negative externalities created by such enforcement -- such as the chilling effects of increased censorship, expensive court cases and other such efforts, and it's kind of amazing that these costs never seem to even enter the public debate, even though many of them are a lot more real than the "costs" presented by the industry for "piracy."